NEWPORT BEACH, Calif. At least one analyst is bucking the conventional wisdom that says Fannie Mae and Freddie Mac need to be reformed to encourage private capital to move back into the housing market.
Scott Simon, a managing director and head of mortgage-backed securities at giant bond buyer Pacific Investment Management Co. (Pimco), is arguing that if the government were to play a lesser role in housing finance, credit standards would tighten, down payments would increase and interest rates would soar because investors such as Pimco would demand higher yields.
Simon, whose Newport Beach, Calif.-based Pimco manages $2 trillion of assets, says while he prefers smaller government, he sees no way to shift the government guarantee to private lenders without significantly raising the cost for borrowers.
Simon is retiring at the end of May after 13 years at Pimco. In an interview with CU Journal sister publication American Banker last week, he made the case for why the GSEs, which were seized by the government in 2008, should remain significant players in the housing market.
“I think it is absolutely conventional wisdom that they need to be reformed,” said Simon. “But how they are reformed is huge. I think they should not have investment portfolios, which is where they blew up in taking all this risk on non-agency subprime loans. I think they need to be run like a utility, without an investment portfolio, and the guarantee function should remain. If you take them away, housing will be lower in price, loans will be harder to get and rates will be higher.
“You look at where we are now with well over 95% of mortgages guaranteed through the GSEs. I am fiscally conservative and believe in small government,” continued Simon. “But the reality is that over the last 70 to 80 years, the government has been incredibly involved in housing since the Depression and massively involved since World War II. Since the agencies lost so much money, everyone went ape and said let’s get them out of housing. We are where we are. The government runs housing and the capital markets are set up to be able to purchase interest rate risk and not credit risk with this massive amount of bonds. And that comes in the form of government- or Treasury-guaranteed securities. Japan will only buy Ginnie Mae securities. Banks need to buy Ginnie, Fannie and Freddie.”
